March 10, 2017

New Mexico tax reform bill faces test in Senate

Those who work on tax policy probably know the saying by the late U.S. Sen. Russell B. Long of Louisiana: “Don’t Tax You. Don’t Tax Me. Tax That Fellow Behind the Tree.”

That is the challenge facing Rep. Jason Harper, R- Rio Rancho, as his bill to revamp New Mexico’s gross receipts tax heads to its first Senate hearing on Saturday before the Corporations and Transportation Committee.

Harper’s House Bill 412, co-sponsored by Sen. John Arthur Smith, D-Deming, is a years-long effort to calculate what it would cost to eliminate tax deductions, credits and exemptions on some 125 separate economic transactions in dozens of industries. Beneficiaries of the tax loopholes include schools and non-profits, lottery retailers, web-hosting firms, aerospace, agriculture and construction businesses.

Richard Anklam of the New Mexico Tax Research Institute says just sorting through technical details of any large, complex tax bill can take weeks, not to mention policy issues. Harper’s bill, which has been through a committee review process, cleared the House with little debate Wednesday on a 63-0 vote. But as of Friday there was still no financial impact report on the amended bill now in the Senate, which doesn’t have much time to go over fine points.

“We’ve got one week,” Anklam said of the legislative session that ends March 18. “Anybody getting gored, you’ll hear from them.”

Harper added his bill means full employment for industry lobbyists who plan to show up at Senate hearings and make their case that various tax breaks create jobs and economic development.

“They were lining up before,” Harper said of his conversations with lobbyists, “and they’re lining up now — tax everyone else but me.”

New Mexico’s tax exemptions, credits and deductions are published in the Taxation and Revenue Department’s annual Tax Expenditure Report. The list includes more than $1 billion worth of tax breaks, and many lawmakers wonder whether they serve any public good. One expert says their skepticism is well placed.

“By improving its incentive transparency and closing loopholes, New Mexico can create greater fairness in its tax code and help balance its budget,” said Greg LeRoy, executive director of the public policy group Good Jobs First, which has analyzed such issues in New Mexico and other states.

Among items on the chopping block in HB 412, for instance, is the annual tax-free weekend for back-to-school shoppers, enacted in 2005, which costs the state $3.5 million. Economists have said these weekends are no bargain because prices are often higher and families who can afford to make all their purchases at once get the most benefit.

The bill would not close every so-called tax loophole. Lawmakers have balked at repealing the tax exemption on groceries and medicine, which costs the state more than $130 million a year. The bill also preserves exceptions for industries that have invested millions of dollars in the state on the promise that they will be subject to lower taxes — the film industry and railroad companies as like Burlington Northern Santa Fe and Union Pacific, which is building an 11-mile-long storage and refueling facility at Santa Teresa near New Mexico’s southern border.

Proponents see the bill as the silver bullet of tax reform, in line with the trend in states such as Utah that are considered tax friendly. In exchange for what would be a broader tax base, with more businesses and individuals paying in, the overall gross receipts tax rate statewide would be reduced, perhaps to a range of 3.1 to 3.5 percent, from what today is a statewide rate over 5 percent.

But lawmakers are acutely aware that if a tax loophole is tucked away somewhere in the law, that is because a constituent, business owner or industry group wants it there.

An analysis of the original House bill, which at one time also included changes to income and property taxes, contains some estimates on the cost of the more significant tax expenditures. The cost of exempting locomotive fuel is $23 million; enriched uranium $20 million; lottery sales $9.3 million; textbooks $8.3 million. The annual cost of exempting non-profit organizations from paying taxes on their supplies and equipment is $82 million.

The most complicated part of the legislation as it stands is that the loopholes would go away on July 1, 2018, but the gross receipts tax rate would not be completely adjusted until data is collected on how much additional money is taken in by the Taxation and Revenue Department.

The gross receipts tax eventually would be lowered to a rate that is “revenue neutral,” Harper said, meaning there is no overall increase or decrease in money flowing to the state.

Harper claims that phasing in the implementation eliminates the fiscal risk for the state, which already faces financial challenges.

But that is also the reason many are nervous about the measure. Conservatives wonder if the state will follow through in lowering the rate sufficiently. Others think there will be pressure to reduce the tax rate too much, forcing more spending cuts by state government.

“The issue that gives people pause is the unknown on what the tax rate will be,” said Anklam of the New Mexico Tax Research Institute. “Are we going to do something that will force us off a cliff?”

Sen. George Muñoz, D- Gallup, said the lack of clarity on a final gross receipts tax rate is “really problematic” for many senators. “No one knows what happens on the other end,” he said.

Another concern is the impact on non-profit organizations, which currently can buy materials and supplies without paying a tax on them.

Harper said a tax on some products would be a small part of most spending for organizations. They are still exempt from paying income and property taxes. “Most of the non-profits I talk with understand that.” he said.

Larry Martinez, regional director for Presbyterian Medical Services, which provides early childhood and behavioral health care to families, said his organization would suffer if it had to pay a tax on supplies and equipment. Insurance contracts with Medicaid would prevent passing along the increase.

“We have many small clinics in parts of the state that are very marginal,” he said.

Harper said Senate amendments to his bill should soothe some of the concerns raised.

Some legislators want to speed up the elimination of some loopholes as a way to boost the state’s cash reserves, he said. The state general fund faces a deficit, with cash reserves in the $6.1 billion general fund below 2 percent. Lawmakers reviewing the loophole-closing provisions in HB 412 are trying to find $100 million that could be collected during the coming fiscal year, which starts July 1.

Terri Cole of the Greater Albuquerque Chamber of Commerce said an indefinite gross receipts tax calculation is not necessarily a concern for the business community. Her organization does not like everything in the bill, but wants it to move forward with changes.

The biggest negative in current law is that many who buy products for the purpose of assembly or resale pay taxes on both sides of the transaction, a concept known as “tax pyramiding.” That is eliminated in HB 412.

“We think it’s a big, bold and responsible step in the right direction.” Cole said. “We support the vast majority of it.”

Hospitals and health-care providers, who are included in other bills moving through the Legislature that would increase what they pay in taxes, also have concerns about Harper’s bill. If the tax rates are changed in one law, then restored in others, whichever measure Gov. Susana Martinez signs last has precedence.

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